In my previous article I looked into the advantages and disadvantages of providing liquidity to Decentralized Finance (DeFi) platforms. You may say that article was written after the fact, as I have been a Liquidity Provider in various platforms in the past. This time I will look into my experiences and share with you my own conclusions and lessons learned.

• Have a plan: You must establish a clear investment plan before committing to a trading pair. It is tempting to simply go for the highest yield. Yield is a misleading metric as it can vary by the minute depending on trading volume.
• Beware of bonuses: Many platforms offer added bonuses to attract funds to a particular trading pair. These bonuses are normally paid in the platform’s proprietary token. But if too many people are earning these tokens it creates a lot of selling pressure and these tokens often lose value constantly. Yields of pairs that have bonuses are inflated as bonuses are normally included in the yield calculations. It is hard to anticipate the real profit you can make on a pair if part of the yield is paid on a token that will most likely lose value before you sell it.
• Mind the fees: Every movement of funds that you make goes thru the blockchain, you must pay the required fees. These fees add up quickly and some can be difficult to detect, as they will be discounted from your wallet in the chains native coin, not the token pair of the pool.
• Look for correlations: Highest yielding pairs are normally those pairing a stable coin with a pure crypto asset. Those are also the tokens that have the least correlation between them. In the end, if you place funds in that type of pairs when you liquidate them you will lose half of the value gained by the crypto coin. This is called Impermanent Loss and, in many cases, it will negate any profit from this operation. When you pick tokens that move in unison to the pressures of the market your Impermanent Loss is reduced. Both tokens will have gained or lost value in similar proportions.
• Choose your pool carefully: Not all trading pair pools are the same. As I have mentioned before, the particular conditions of the coins involved can make one pair riskier than another, but another important factor is the pair’s transaction volume. Trading pairs that have higher trading volume will collect more money in fees. This will result in higher yields for liquidity providers. Look for pools in platforms that handle heavy traffic, such as Pancakeswap, you may find good opportunities there.
• Stay involved: It is tempting to think that providing liquidity is just like earning interest from a bank, but you would be wrong. Crypto asset’s valuations vary constantly, you must be alert to be able to exit the pool once the pair no longer provides the expected return. Monitor your pools constantly, if you let impermanent loss get too big you may not get a return on your investment or end up losing value.

These are some of the most valuable lessons I have learned in some four years I have been dabbling in the crypto DeFi space. Please do not consider these notes as financial advice, these are just my personal observations, your experience may be quite different.